OTTAWA - Retail sales took a pounding in July in three provinces that increased their sales tax, driving the sector into negative territory countrywide.

Statistics Canada reported Wednesday that retail sales fell 0.1 per cent to $35.9 billion across Canada in July. That was far weaker than the consensus prediction of a 0.6 per cent gain, as Canadians spent less on furniture, home furnishings, electronics and appliances.

But the surprising weakness was only registered in Ontario and British Columbia, which introduced the new harmonized sales tax on July 1, and Nova Scotia, which hiked its HST by two percentage points.

Nova Scotia sales were down 5.3 per cent, the largest decline of any province, B.C. was off 0.4 per cent and Ontario sales dipped 0.3 per cent.

Excluding those three provinces, sales were actually up 0.5 per cent in the rest of the country.

The agency said overall retail sales in volume terms edged down 0.2 per cent.

But while the HST-effect was important, analysts note that consumer spending has been cooling with Statistics Canada revising its positive June reading into a small drop as well.

On a deeper level, July's retreat by the consumer sector, which had been the main driver of Canadian economic growth, means gross domestic product likely contracted during the month.

That would be the first setback since August 2009, when the economy was just beginning to come out of the recession.

"Much like the United States, the momentum in the broad cross-sections of the Canadian economy has been lost in the last month or two, and that's disconcerting," said Derek Holt, vice-president of economics with Scotia Capital.

Not only retail sales, but employment, manufacturing shipments, wholesale sales, net exports, and housing starts all were down in July.

"That's a lot of negatives," said economist Douglas Porter of BMO Capital Markets. "It looks like the economy has gone from fourth gear to second or possibly first."

Holt said his bank's forecasting unit will issue a new projection Friday predicting growth will be negative for the month. Statistics Canada will release its GDP report next week.

There was one bright spot on the economic horizon Wednesday — Statistics Canada said leading indicators for August were positive at 0.5 per cent.

Analysts also note that retail sales do not include consumer spending on services, which represent 60 per cent of the sector.

As well, anecdotal evidence suggests the mining sector had a good month, along with utilities, due to heavy air conditioning usage.

But July's retail data is consistent with a general trend pointing to subdued economic activity in the past several months that could see growth dip to about 1.5 per cent in the third quarter — the July-September period.

CIBC issued a new forecast for the country suggesting the sluggish pace will continue into next year, with the economy advancing by a mere 1.9 per cent in 2011. That's a full point below the Bank of Canada's official estimate.

The details of the retail report shows losses were isolated, but deep. Furniture and home furnishing sales dropped 8.4 per cent, the largest decline in the 11 sectors surveyed. Sales at home furnishings stores alone were off 15 per cent.

Sales were down 4.9 per cent at electronics and appliance stores.

On the other hand, general merchandise stores saw sales rise 2.4 per cent after three months of decreases.

Motor vehicle and parts sales increased one per cent, while new car sales rose 1.1 per cent. Gas station sales rose 0.7 per cent after three consecutive monthly declines.

Sales at clothing and clothing accessories stores rose 0.9 per cent.

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